Friday, October 14, 2016

by Marc Trachtenberg
"...The crisis, though long expected, came to a head in mid-1971. The new
secretary of the treasury, John Connally, laid out the policy in May. The crisis
would be allowed to develop “without action or strong intervention by the
U.S.” At an appropriate time, the gold window would be closed, and trade restrictions
would be imposed. This would lead, at least for the time being, to a
system of floating rates. The main goal was to get the surplus countries to revalue
their currencies, but the United States would make clear—both for bargaining
purposes and as a fallback position if revaluation negotiations
failed—that it could live indefinitely with the floating rate system.35 Nixon
approved this course of action and wanted to “move on the problem,” not
“just wait for it to hit us again.”36 The new measures were announced on
15 August. The gold window was closed, a border tax was imposed. Nixon
had gone on the offensive. The tone of U.S. policy in this area was nationalistic.
The emphasis was still on getting the Europeans and the Japanese to accept
a substantial realignment of exchange rates, but the goal of systemic
change had not disappeared entirely. According to Shultz, who was in a position
to know, the 15 August package “was designed to be a signal that the
United States was seeking a fundamental change not only in existing exchange
rates but also in the monetary system itself.”37
Shultz’s influence at this time was on the rise. By late 1971, Nixon had
evidently come to share the Shultz view that a major structural reform was
needed and that it would be a mistake to go back to the “old system of parities,
but with different exchange rates.”38 This was probably why the question
of a devaluation of the dollar in terms of its gold price was now so important.
If the price of the dollar could be set in terms of gold, then why should all the
exchange rates not be set by international agreement? That was the old system,
and the basic goal now for Shultz and, increasingly, for Nixon, was to
move on to something better. But Connally, who was being criticized for his rough tactics, was under pressure to settle, and he in effect offered to devalue
the dollar as part of a rate realignment package.39 Nixon, who had made clear
he did not favor devaluation, was angry.40 But the Connally offer could not be
rescinded. A series of negotiations between the West Germans and the
French; then between Nixon, Kissinger, and Pompidou in the Azores; and,
ªnally, in late December 1971 between all the major trading nations at the
Smithsonian Institution in Washington—followed in rapid order, leading to
an agreement that set new parities but did not restore convertibility.
The United States, however, did little to “defend” the new rates.41 Shultz
had taken over from Connally as secretary of the treasury in early 1972, and
the choice not to defend the rates was in line with Shultz’s basic approach to
the problem. His goals were more ambitious than Connally’s had been. He
wanted a fundamentally new system in which the market would play the central
role in setting exchange rates. But he was no Texas cowboy. His methods
were subtle and indirect. He thought of himself as a strategist who sought to
“understand the constellation of forces present in a situation” and tried to arrange
them so that they pointed “toward a desirable result.” The aim was not
to dictate the terms of a settlement but “to get the right process going” and allow
things to take their course.42
Shultz’s style was thus not to force his views directly on other people. He
was a “conciliator and consensus builder” and could “work with almost inhuman
patience to bring a group into agreement upon a decision that all could
support, at times submerging his own preferences.”43 The most striking example
of this was his willingness in mid-1972 to accept a “par value system supported
by official convertibility of dollar balances,” provided the burden of
adjustment was shared equally by both surplus and deficit countries.44 A plan
of that sort (which, however, would also allow countries to “float their currencies”)
was announced in September 1972.45 The plan was well received because it showed that the U.S. government was serious about reform. For
Shultz, however, a negotiation based on this kind of plan was not the only
way to bring a new system into being. For him, the road to reform had two
lanes, “one of negotiations and the other of reality. A conclusion would be
reached only when these two lanes merged and the formal system and the system
in actual practice came together.”46 A system of floating exchange rates
came into being de facto with the collapse of the Smithsonian agreement in
early 1973. The two lanes converged when the reality of the floating rate system
was recognized by the Jamaica agreement of January 1976..."

35. Treasury Paper, 8 May 1971, in FRUS, 1969–1976, Vol. 3, pp. 423–427, esp. 425.
36. Huntsman to Connally, 8 June 1971, in FRUS, 1969–1976, Vol. 3, p. 443. The Nixon tapes provide
some extraordinary insights into U.S. policymaking at this point. Some key passages were transcribed
and presented in Luke Nichter, “Richard Nixon and Europe: Confrontation and Cooperation,
1969–1974,”Ph.D. Diss., Bowling Green State University, 2008, ch. 3.
37. Shultz and Dam, Economic Policy, p. 115.
38. Editorial Note, in FRUS, 1969–1976, Vol. 3, pp. 521–522. See also a letter of 8 September 1971
to Under Secretary of the Treasury for Monetary Affairs Paul Volcker from Shultz’s assistant director,
Kenneth Dam (he and Shultz later wrote a book together), cited in FRUS, 1969–1976, Vol. 3, 179
n. 1, and warning (in the editor’s paraphrase) that “focusing on quantitative goals before agreeing on
the type of international monetary system the administration wanted might constrain long-term options.”
See also Nixon-Kissinger Telephone Conversation, 28 October 1971, in Kissinger Telephone
Conversations Collection, DNSA/KA06727.

"So the whole point of an interventionist policy in this area was not to
help the Europeans with their monetary problems, but to keep the Europeans
from coming together as a bloc. The idea was that the United States might be
able to achieve that goal by selectively intervening on a country-by-country
basis. U.S. officials took for granted that they could not oppose the Europeans
head on: “We couldn’t bust the common float without getting into a hell of a
political fight,” Kissinger said. The United States had to do what it could “to
prevent a united European position without showing our hand.” He emphasized
that this policy was not based on an assessment of U.S. economic interests:
his objection to what the Europeans wanted to do “was entirely political.”
He had learned from intelligence reports that all of the administration’s
enemies in the West German cabinet “were for the European solution,” a disclosure
that pretty much decided the issue for him.76 A year later, at a time
when U.S. problems with Europe were coming to a head, he laid out his
thinking on the issue in somewhat greater detail. “We are not,” he said, “opposed
to a French attempt to strengthen the unity of Europe if the context of
that unity is not organically directed against us. So I am not offended by the
ºoat idea as such, or by common institutions.If, however, it is linked to the
sort of thing that is inherent in the Arab initiative [i.e., the Europeans’ plan at
that point for a “dialogue” with the Arabs, which Kissinger viewed as a hostile
move], as it seems to be, then we have a massive problem. Then we have the
problem that we have got to break it up now.”77"

74. Nixon-Kissinger-Shultz Meeting, 3 March 1973, Tape Transcript, in FRUS, 1969–1976, Vol. 31,
p. 79.
75. Brandt to Nixon, 2 March 1973, in FRUS, 1969–1976, Vol. 31, p. 49; and Nixon to Brandt,
3 March 1973, in FRUS, 1969–1976, Vol. 31, p. 92.
76. Kissinger-Simon Telephone Conversation, 14 March 1973, in DNSA/KA09752; and KissingerSimon
Telephone Conversation, 15 March 1973, in DNSA/KA09779. Extracts were also published in
FRUS, 1969–1976, Vol. 31, pp. 123, 126. The following month another intelligence report about
Brandt was circulated to top U.S. ofªcials. “Apparently,” Federal Reserve chief Arthur Burns wrote in
his diary on 3 April 1973 that “we know everything that goes on at German cabinet meetings.” Arthur
Burns Journal II, p. 60, in FDPL.
77. Secretary’s Staff Meeting, 22 March 1974 (dated 26 March), p. 50, in DNSA/KT01079. Note also
a comment Kissinger made in a 6 March 1974 meeting with Secretary of Defense James Schlesinger:
“I am convinced we must break up the EC. The French are determined to unify them all against the
United States.” See DMPC:Nixon/FDPL.

Thursday, September 15, 2016

"Controlled Middle East oil, it would control the world. This oil represents 65 percent of world oil reserves. Therefore, America believes if it squashed Iraq, it would control the oil of the Middle East and consequently hold the oil in its hands [and] fix its price the way it likes."

Keeping Iraq's Oil In the Ground

"Did Dick Cheney send us in to seize the last dwindling supplies? Unlikely. Our world's petroleum reserves have doubled in just twenty-five years -- and it is in Shell's and the rest of the industry's interest that this doubling doesn't happen again. The neo-cons were hell-bent on raising Iraq's oil production. Big Oil's interest was in suppressing production, that is, keeping Iraq to its OPEC quota or less. This raises the question, did the petroleum industry, which had a direct, if hidden, hand, in promoting invasion, cheerlead for a takeover of Iraq to prevent overproduction?

It wouldn't be the first time. If oil is what we're looking for, there are, indeed, extra helpings in Iraq. On paper, Iraq, at 112 billion proven barrels, has the second largest reserves in OPEC after Saudi Arabia. That does not make Saudi Arabia happy. Even more important is that Iraq has fewer than three thousand operating wells... compared to one million in Texas..."

Saturday, September 3, 2016

"Negative rates have invalidated the normal business model of central banks, which consists of issuing zero-interest bearing cash as liabilities and earning a return on their assets (the resulting profits are called “seigniorage”). But many central banks are now earning a negative rate on their assets. Seigniorage, in fact, might now become negative in the euro area and in Japan.

Bond purchasing programmes (called usually QE for quantitative easing) offer central banks at least temporary profit opportunities since they can issue liabilities at lower rates than the long-term bonds they acquire. The resulting profits should be regarded in the same way as those of investment banks. For the time being, central banks are making large profits on their investment banking activities, but little in terms of traditional seigniorage.

The QE programme of the European Central Bank does not increase its seigniorage revenues, because 80% of the euro area’s sovereign bond purchase programme is done by the national central banks on their own accounts.

The policy implication of this assessment is that the seigniorage income of the ECB will be much smaller than many assume and one should thus not count on it as a source for any euro-area projects."

One way to address the issue of the management of foreign exchange reserves is to start with an economic system in which no reserves are required. There are two. The first is the obvious case of a single world currency. The second is a more useful starting point: a fully functioning, fully adhered to, floating rate world.All requirements for foreign exchange in this idealized, I should say, hypothetical, system could be met in real time in the marketplace at whatever exchange rate prevails. No foreign exchange reserves would be needed.If markets are functioning effectively, exchange rates are merely another price to which decisionmakers--both public and private--need respond. Risk-adjusted competitive rates of return on capital in all currencies would converge, and an optimized distribution of goods and services enhancing all nations' standard of living would evolve.Only liquid reserves denominated in domestic currency would be required by public and private market participants. And in the case of a central bank of a fiat currency regime, such reserves can be created without limit.But, clearly, the real world is not perceived to work that way..Read in full here ->Source:https://www.federalreserve.gov/boarddocs/speeches/1999/19990429.htm

Wednesday, August 17, 2016

"The postwar international financial system went along with several
“forums” of decision making, official as well as unofficial. Starting with the
Bretton Woods Institutions, namely the International Monetary Fund (IMF)
and the International Bank for Reconstruction and Development (IBRD, the
World Bank), bi-lateral negotiations between the United States and the European
countries took part in the “forum” for reconstruction; the Bank for
International Settlements (BIS) and the European Payments Union (EPU)
began to play important roles in the 1950s; several “Groups”, from the G10,
C20 to the G5, G7, faced the reform of the Bretton Woods System.
Of the above “forums”, one of the most enigmatic bodies was the Working
Party 3 (WP3) of the Organisation for Economic Cooperation and
Development (OECD). Set up in 1961 as a mere technical working group for
the Economic Policy Committee (EPC) of the OECD, the WP3 soon became
an important meeting place to discuss the overall strategies of the world
economy. Chaired by Emile van Lennep (later Secretary General of the
OECD), the WP3 brought together not only the brightest agents of the OECD
member countries, but also representatives of the BIS and the IMF..."

Monday, July 25, 2016

International Monetary System (for use in United Kingdom, Germany, Belgium, Italy; see separate talking paper for France)

1. We are both interested in improving the international monetary system.

2. In this context, it is essential to bring inflation under control in the United States. This is a major goal of my Administration.

3. We have been looking in a preliminary way at a number of proposals to see whether there are responsible improvements that can be made in the system. On most of these we have no final view. I would be glad to hear what is in your mind.

4. We have decided that an early and substantial activation of the Special Drawing Rights would be extremely useful. This would be a demonstration to the exchange and gold markets that we “mean business”, as we say in the United States. A hesitant approach in timing or magnitude would encourage those who profit from uncertainty. It would leave individual monetary authorities under political pressure to build up their gold reserves to an unnecessary and undesirable degree. I want to make clear that we do not regard activation of Special Drawing Rights as absolving us from the fiscal and monetary discipline needed to improve our balance of payments position.

5. (If the discussion proceeds to more specific questions as to where and how many Special Drawing Rights we would like to see created, the following might be added.) I understand that during the negotiations, illustrative figures were mentioned for activation at the rate of about $1.5-$2 billion a year for the initial period of five years. My advisers say it would be the part of wisdom to begin with a substantially [Page 304]higher figure, particularly in 1969 and 1970. Ideally we would like to see activation before August, to be announced at the end of September at the IMF Annual Meeting.

6. There is a second problem that concerns us. The process of international adjustment of balances of payments has become too dependent upon selective controls and restraints. We would like to stop the drift in this direction and search for other methods of reducing excessive and persistent deficits and surpluses.

7. We owe it to ourselves to explore every possible new proposal for improving the system, including those under discussion in academic circles. We must be careful to do so without upsetting confidence.

8. Whatever changes we might encourage in the monetary system, none will avoid periodic crises affecting individual currencies. As a result, we will continue to need intensive financial cooperation.

8a. (Only for Germany and Italy) We appreciate the efforts made by your country to channel excessive inflows of capital out of reserves and into international monetary and capital markets, as well as your participation in financial assistance for countries facing exchange difficulties.

9. I share the view that, unless we have reached a closer meeting of minds, it would be dangerous to undertake a formal international monetary conference.

10. Finally, you should know that I am not going to seek an answer to these problems through a change in the monetary price of gold.2 I do not see the need or reason for such action.

Final Note

11. If any interest is expressed in pursuing bilateral discussions with the United States, you might say that Secretary Kennedy would be [Page 305]glad to meet with representatives of the country concerned in Washington.

Source: Washington National Records Center, Department of the Treasury,Volcker Group Masters: FRC 56 86 30, VG/LIM/1-VG/LIM/30. Confidential; Limdis. An attached cover note from Willis to members of the VolckerGroup, dated February 19, indicates that page 1 was a corrected copy. A February 17 draft, labeled “2nd draft,” indicates Willis prepared it. (Ibid., Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Current Problems and Contingency Planning 11/68-4/69) President Nixontraveled to Belgium, the United Kingdom, the Federal Republic of Germany, Italy, and France February 23-March 2. See Document 116 for a Talking Paper prepared for the President's use in France.↩

On February 20 Chairman of the Council of Economic Advisers McCrackensent President Nixon a memorandum regarding De Gaulle and the price of gold. McCracken saw no need for the President to respond directly to an anticipated request, “on a metaphysical level,” to increase the price of gold but to emphasize “our interest in a better monetary system, and our concern about growing controls over trade and capital movements.”McCracken saw no advantage to increasing the gold price but concluded: “It is equally important not to allow the French, or anyone else, to see any signs of flexibility on gold except in the context of our general position. If we are to be cooperative on gold, there must be a total package that makes it worth our while.” (National Archives, Nixon Presidential Materials, NSCFiles, President's Trip Files, Box 442, Feb-March 69 Trip to Europe) On February 22 Arthur Burns also sent the President a memorandum on gold.Burns wrote: “you have been correctly advised to show no interest on our part in an increase in the price of gold… . By all means let us try to keep the official price as it is, but let us also watch carefully the costs that we may incur through such a policy. And whatever else we may do, let us not develop any romantic ideas about a fluctuating exchange rate: there is too much history that tells us thata fluctuating exchange rate, besides causing a serious shrinkage of trade, is also apt to give rise to international political turmoil.” (Ibid.

Wednesday, June 1, 2016

1/ It's a Big World -December 1, 1998

"...The idea that mankind is cooking the earth by burning hydrocarbons makes sense when you hear an advocate explain it. When I heard opponents oppose it, I found they made sense too. If there is a political draw, the tendency is to split the difference. But I was not happy with this outcome and again went to Easterbrook, who covered the environment for Newsweek. I found in his book, A Moment on the Earth, that he comes down about 90% for the skeptics. I then decided to make some inquiries of my own. I began with ......That seemed like a lot of hydrocarbons. Holy smokes, billions of barrels!!! But I wanted to imagine it in one place. How much area would it cover if it were a giant pool of petroleum? After some simple arithmetic, I realized the pool was not as big as I thought it might be, and would not put a dent in any of the Great Lakes, I wondered how many Lake Tahoes it would fill. We called Tahoe and were quickly told they had a precise estimate of the number of barrels of water in that alpine lake on the Nevada/California border. Eleanor, can you believe 946 billion barrels? In other words, if you drained all the water out of Tahoe and filled it with all the oil ever consumer by mankind, it would not quite fill ONE FIFTH of the cavity!..."

Source: http://www.polyconomics.com/memos/mm-981201.htm

2/ One Energy Crisis After Another - December 8, 2004

"...The reason there were no shortages prior to the “floating dollar” that we are still living with is that the energy industry knew that if the dollar/price of gold was $35 oz today and would be $35 oz ten years from now, the price of oil at $2.50 bbl today would be in the ballpark of $2.50 ten years from now. The oil market, without having meetings to regulate supply in an attempt to fix the oil price, would automatically operate in a way that always kept a 10% surplus of an oil delivery system ready to go if there was an unexpected disruption… a worker’s strike, a hurricane, a war, tensions in the Middle East that looked like war, etc. There was never, ever any discussion about the United States having a “strategic petroleum reserve” on hand to meet such contingencies. If there was a disruption over here, our private oil companies could easily switch to the buffer supplies over there. The price of delivery might increase by a few cents a barrel, but once the crisis passed everything would go back to normal...."Source: http://www.polyconomics.com/memos/mm-041208.htm

Karl Blessing died during his vacation in southern France last week aged 71. He was the president of the Deutsche Bundesbank from 1958 to 1969. The last major interview before his death was granted to SPIEGEL editor Leo Brawand for a nonfiction book, under the title "Where is the German economy heading?" that will be released next autumn in Munich based publisher Kurt Desch.

From the interview we have extracted the following excerpt about inflation:

QUESTION: Mr. Blessing, it is possible to have full employment, price stability and a balance of payments equilibrium at the same time?

BLESSING: This is an idealism that is very beautiful, but not feasible in this world.

QUESTION: Other countries don't take it as seriously with monetary. You know the quote of the "Financial Times" in London, there is always the German hunter Schmidt, who does a false step?

BLESSING: I would assume the wrong step and would correct every time needed by a change in exchange rates, that is how far I am today.

QUESTION: That would ideally mean floating exchange rates or very large bands for exchange rates?

BLESSING: I would not introduce floating exchange rates, but I would ask: When does a balance of payments imbalance occur? If a fundamental imbalance is present, every two or every three years, you have to change the mark currency exchange rate.

QUESTION: What do you think of the Brussels proposals, to get closer to monetary union in Western Europe initially through a coordinated monetary policy for a transitional period from 1971 to 1973, and especially in budgetary policy with a binding coordination rule ?

BLESSING: It will be extremely difficult, a very difficult undertaking, the good Mr. Werner, I know him very well, I often had contact with him, is an idealist. If his plan were possible it would be wonderful. But the conditions are different. How do you want to force a national parliament to make certain things or not to do them?

QUESTION: Exactly, because all that has a domestic political effect

BLESSING: ... internal political effects that can lead to other election results or anything else. How can you do that? The French - the good Giscard d'Estaing is considered a monetarist. He wants to move forward through the currencies in the EEC. But when it comes to give up sovereign rights or to pool, then the French Government does not want to participate. So what is the logic in that. If a wage explosion comes as Italians did in the fall of 1969 or à la France in May 1968, how do you want to have a single currency, a monetary union? This is only possible if all the politicians are willing to waive sovereign rights and to transfer the sovereignty to a headquarters in Brussels.

QUESTION: At a central European central bank?

BLESSING: Yes, if one were to create a European central bank, a Federal Reserve System of Europe, which is autonomous from the governments - and within this system governments would only be able to finance budget deficits to some degree - then you could get it right.

QUESTION: It is to be expected, that the dollar flow to Europe because of the American Chronic payment deficit contributes to our inflation ...

BLESSING: ... it has contributed to a significant extent

QUESTION: ... that inflow could be slowed down through the construction of such a European currency, so to speak, as a counterweight to the dollar.

BLESSING: There is no doubt that we could, if we had really the political will in the EEC, to form a hard currency block whose rates could then fluctuate against the dollar. We could then leave the dollar standard, that we have today. Because in practical terms we a dollar standard.

QUESTION: Yes, sure, and is it not that we - for example, and also you during your time at the Bundesbank and still today - by retaining American US Treasury securities, and large dollar holdings and by not exchanging dollars to gold we substantially support the Americans ...

BLESSING: ... and have supported the Americans. I tell you today that I myself personally feel guilty regarding this question. I should have been more rigorous with America. The dollars that arrived in Germany should simply have been rigorously exchanged to Gold,

QUESTION: With the support of the central banks, the Americans have never come under pressure?

BLESSING: No, they have never come under pressure with their monetary policy. They always made promises: Well, next year it will be different, in the next two years we will get the budget and everything in order, we are strong. They are strong as an economic nation. But they never made it, there was always something else. Then came the Vietnam war, President Johnson and his financial policies, with a 25-billion-dollar budget deficit in one year. All those were reasons for the inflation. I often said to my American colleagues: It's always continues with you, then the story with the troops started.

QUESTION: You mean the threat of the Americans: If you do not support the dollar in this way, we pull the troops back from the Federal Republic?

BLESSING: It was never a verbal threat, but the threat was always there in the background. The former High Commissioner McCloy was once at the German Government and said: Listen, we had a Senate decision and there will be soon a majority that might want to get as back. We have to do something. He called me on a Sunday afternoon at half past three at home and said: "I have to fly back tonight, can we meet?" And I told him. "My dear McCloy, your situation is clear, you have a balance of payments problem and nothing more. You've seen we have been reasonable and have not converted our dollars to gold. I am willing to give you that even in writing for a certain period. Unfortunately the letter I wrote still applies today.

Friday, December 18, 2015

"...From the written material that survives it seems as though the possibility of a
basket including gold was never explicitly considered. In a subsequent article,
however,16 the late Sir Joseph Gold gave it as his opinion that even the partial use
of gold would be precluded. As the principle architect of the text of the 2nd
Amendment, his obiter dicta obviously carry weight. But, as I have suggested,
times have moved on and there is no longer any need to anathematize gold,
especially if its partial use in this way might improve the economic lot of a small
number of countries which need all the stability they can get.
The law, perhaps, is too important to be left to lawyers..."